One person 401(k) Plan

[FJR]

I may be confusing myself, but here is the question

Lets say for 2002, you have a sole prop. who earns 50,000. They establish a 401(k) with all the required EGTRRA amendments.

My calculation is you would take 1/2 the SE tax which would leave around $46,500. My question is can they contribute the 11,000 deferral + 25% of the $46,500(another $11,500) or can you apply the 100% or $40K limit of comp for 2002 which would then be a total contribution of $40,000?

[KJohnson]

While the 415 limit is $40K, you are still left with a 404 deductibility limit of 25% of comp (self employment income adjusted) plus the deferrals or approximately $22,500 in your example.

[Blinky the 3-eyed Fish]

Actually, with $50,000 of compensation, the maximum profit sharing contribution that could be made is $9,293.52 since the $50,000 would have to be reduced for the contribution.

Gross comp = 50,000.00

1/2 SE taxes = 3,532.39

Contribution = 9,293.52

Compensation = 37,174.09

37,174.09 * .25 = 9,293.52

[KJohnson]

Of course you are right Blinky--I was focused on the 404 and 415 distinction and typed without sitting down and going through the earned income calculation.

[FJR]

Blinky, I thought that the 25% limit is based on NEI which doesn't include any of the contributions made on behalf of the self employed individual unless it is made on behalf of a non owner.

[Guest hpaine]

Wouldn't top-heavy rules also apply here since he is a sole-prop. and the only person contributing to the plan?

[Mike Preston]

hpaine, yes the plan is top-heavy, but how does that modify anything that Blinky said?

[Mike Preston]

fjr, I admit to not understanding your comment.

[Guest Rosemary Raymer]

On the NEI - the formula for the employer contribution in a sole prop is 25%(y-x) = x where y is Net Income and x is the contribution.

And, what affect would being top-heavy have on a one person plan? Most likely vesting is immediate since the one participant has designed the plan to suit himself, and no minimum contribution would apply since the only participant is a key employee.